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Lessons from the Rhode Island banking crisis

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  • Thomas E. Pulkkinen
  • Eric S. Rosengren

Abstract

The failure of the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), a private insurance fund, and the closure of its 45 remaining member institutions froze the accounts of 300,000 individuals and 10 percent of all deposits in the state. While the closure of two institutions triggered RISDIC’s demise, flaws in both design and management had set the stage for failure and are the focus of this article. The authors group RISDIC’s problems into three categories: risk concentrations, control of the insurance fund by those it insured, and RISDIC’s inadequate regulatory oversight of members. ; Concentrations of risks abounded. Both the fund and the geographic area it covered were small, and member institutions lent heavily in real estate. The fund’s failure to sufficiently reserve against this exposure was particularly problematic: RISDIC could not have covered major losses at any one of its 10 largest members. RISDIC also neglected standard regulatory practices in supervising member institutions. Adequate deposit insurance rests on several fundamentals, among them diversification, independent supervision, disclosure of weaknesses, and adequate reserves; RISDIC managed to delay but not avoid the consequences of neglecting these principles.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1993)
Issue (Month): May ()
Pages: 3-12

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Handle: RePEc:fip:fedbne:y:1993:i:may:p:3-12

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Keywords: Deposit insurance ; Bank failures ; Rhode Island ; Financial crises;

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Cited by:
  1. Walker F. Todd, 1994. "Similarities and dissimilarities in the collapses of three state- chartered private deposit insurance funds," Working Paper 9411, Federal Reserve Bank of Cleveland.
  2. Robert A. Eisenbeis & George G. Kaufman, 2007. "Cross-border banking: challenges for deposit insurance and financial stability in the European Union," Working Paper 2006-15, Federal Reserve Bank of Atlanta.
  3. Robert A. Eisenbeis, 2004. "Agency problems and goal conflicts," Working Paper 2004-24, Federal Reserve Bank of Atlanta.
  4. George G. Kaufman & Steven A. Seeling, 2002. "Post-resolution treatment of depositors at failed banks: implications for the severity of banking crises, systemic risk, and too big to fail," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 27-41.
  5. John S. Jordan, 1998. "Resolving a banking crisis: what worked in New England," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 49-62.
  6. George G. Kaufman, 2003. "Depositor liquidity and loss-sharing in bank failure resolutions," Working Paper Series WP-03-02, Federal Reserve Bank of Chicago.

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